High yield hybrids lack appeal

The government guarantee of bank deposits may be diminishing the appeal of hybrid securities from banks and other companies that offer a substantial yield premium over money market rates.

An aversion to hybrids, and their riskier profile relative to the yields on guaranteed bank paper, appears to be one of the reasons for the decision by Bendigo and Adelaide Bank to abandon the bookbuild due yesterday for its planned sale of $75 million in converting preference shares.

Though intended to be an essentially retail offer the bookbuild, through selected brokers, still needed to confirm the pricing (which the bank had foreshadowed at between 4.5 percentage points and 5.0 percentage points over the bank bill rate).

The recent decline in value of the similar ANZ hybrids (which were priced rather aggressively at 2.5 percentage points over the bank bill rate) is also wearing the blame for the bank's decision.

Bendigo needs to raise some form of hybrid capital to refinance maturing subordinated debt, though the bulk of that debt is not due for repayment until March 2009.